By Maurice Stouse, Financial Advisor & Branch Manager
Leading off our list would be interest rates. We watch, daily, the yield on the 10-year U.S. Treasury Note (USTN). That is a leading indicator for the stock and bond markets. It also is a leading indicator for mortgage rates as well. It is important to be aware of how changes in the rate can impact stocks. A rising yield means a declining price for bonds (and investors are selling bonds and buying stocks). A declining yield might mean Treasury prices are going up and there is more demand for those, and investors are moving assets from stocks to bonds.
When we refer to investors, we are pointing more toward professional investors vs. individual investors. By some indicators, professional investors account for almost 80% of the daily volume in the stock market What or who are professional investors? Those could be hedge funds, mutual funds, private equity funds, trading firms, pension funds as well as others. Professional investors are less likely to be buy and hold vs. individual investors, because they rely on shorter term profits or returns for performance (in our opinion).
The question on everyone’s mind is will rates on the 10 year remain the same, head higher or go lower? A few things impact that, the first of which is inflation. While inflation has come down, it remains to be seen if it will continue to decline, head back up or remain the same.
Next would be the borrowing demand of the U.S. Treasury. That is from the issuance of new debt as well as the refinancing of maturing debt.
Lastly is the strength of the U.S. dollar. At this writing, it is up in value almost 4% over the past 12 months. Many would think the dollar is too high citing the fact that a too strong dollars makes U.S. exports costlier overseas.
Next, we look at valuations. In other words, the prices for stocks and bonds and if they are becoming over-valued, undervalued or fairly valued. We would agree the overall stock market (after two straight years of 20% returns) has grown rapidly and is overvalued. What follows would mean earnings would have to up or prices would have to come down. We do also share the concern that a majority of the returns have been from just 10-20 stocks.
Bonds, on the other hand, might be seen as cheap. The risk with bonds is if they move down from where you bought them and you feel like it is a losing proposition. A few things about bonds: 1) You know what you will have and when you will have it. 2) You can sell them at any time (subject to market movement) and they help reduce risk in your overall portfolio. We have heard and read that Warren Buffet, the famous U.S. investor, prefers stocks over bonds, because of the greater potential over time. But we have also learned that he does include short-term bonds in his holdings, but also that he currently has built a lot into cash or money markets. Money markets continue to offer a compelling yield and do not come with the same risk as bonds—after having said we believe bonds can be used to diversify portfolios. The same can be said for tax-free bonds which have experienced lower prices and hence higher yields.
Gold, silver and other precious U.S. metals, we feel, should play a part in a long-term, diversified portfolio. We also believe that a small percentage of commodities in a portfolio can be beneficial. Also take note that precious U.S. metals, gold and silver and others have seen significant rises in price over the past 12 months. Many wonder what might be driving that, particularly with the U.S. dollar so high. We think it is a lot of foreign buying that has driven those prices. By the way, foreign investment in the U.S. stock market has grown significantly over the past decade. The strong dollar has helped to fuel that. We do take note that if the dollar were to eventually begin to decline that investments in foreign markets might see stronger returns.
And then there is crypto. That is a difficult one to address as many investors do not want to overlook what might be an emerging choice for them to allocate their assets. Raymond James has continued to decline to offer trading in these types of assets and we take note of that with a cautionary tone. We agree that it has added elements of risks, among them, as Raymond James points out, lack of regulation. There are some known and some unknown risks and we do not encourage investors to consider investing in crypto assets at this time.
There is much more for savers and investors to consider when it comes to investing and saving. Investment objective, time frame and risk tolerance cannot be overstated in their importance when making investment decisions.
Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management/Raymond James. Main office: The First Bank, 2000 98 Palms Blvd., Destin, 850.654.8124. Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com.
Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC, or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. The First Wealth Management and The First Bank are not registered broker/dealers and are independent of Raymond James Financial Services.
Views expressed are the current opinion of the author and are subject to change without notice. The information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. Raymond James advisors do not provide tax or legal advice. Please see a tax professional for advice specific to your own situation.
There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Future investment performance cannot be guaranteed, invest yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or a loss regardless of strategy selected, including diversification and asset allocation. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered to be representative of the U.S. stock market. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
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